US Natural Gas Prices at 10-Year Low as Warm Weather Weakens Demand

Natural gas futures slumped to a 10-year low, as warm winter weather dampens demand and pressures prices that are already falling on record supplies.

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“This is a classic case of oversupply,” said Daniel Yergin, chairman of IHS CERA. Natural gas on the Nymex fell 6.8 percent Tuesday, finishing the day at $2.4880 per million BTUs, its lowest settle since March, 2002.

“We’re behind on degree days. It’s been above normal in terms of the temperature, and that has just collided with a record amount of supply being produced and in storage. We’re going to end the season with a record amount of gas in storage, yet again,” said John Kilduff of Again Capital.

Kilduff said the storage estimates for the winter season’s end, March 31, range from about 2 to 2.4 trillion cubic feet, well above the average 1.5 trillion cubic feet.

The Energy Department last week reported natural gas supplies 17 percent above the 5-year average. At the same time, December’s temperatures were well above normal and milder-than-normal temperatures are expected to return.

The U.S. natural gas supply has gotten a big boost from shale gas production, which has been criticized for its potential environmental impacts, including water contamination. Ohio officials recently halted some activity at wells used for wastewater disposal for oil and gas drilling, due to concerns it created seismic activity.

“This is why it’s going to be such a great debate here going forward. It’s really all about fracking and shale gas. We’ve cut these prices some 80 percent because of it, so what do you do?” Kilduff said. Natural gas hit a high of $15.3780 per million BTUs on Dec. 13, 2005.

“This isn’t like we’re saving 10 cents a gallon on gasoline. This is like gasoline is at 80 cents a gallon. That’s why this is a real difference-maker for the economy and energy prices. You can’t dismiss this as easily as some of the other energy debates we’ve had over the last decade or two.”

Hydraulic fracturing, or fracking, requires millions of gallons of water, sand and chemicals to be pumped into the ground, to break apart rock structures, to free natural gas that was otherwise unobtainable.

“A lot of this debate about the environment is really a debate about whether the states, which traditionally regulated natural gas production, would continue to do so or whether more the of the responsibility would shift to the federal government, in particular the EPA,” said Yergin.

Yergin said shale gas production provides about 35 percent of the U.S. natural gas supply, from 2 percent in 2000.

“Up until 2008, the expectation was that we were going to be a huge natural gas importer, and in fact we were on a course to bringing in $100 billion a year of imported LNG (liquefied natural gas),” Yergin said. Now the U.S. is on track to export more gas.

Yergin said the price and abundance of natural gas in America has also made it more palatable for industry to consider locating plants in the U.S. again. He pointed to the example of Dow Chemical and its plans for new petrochemical production in the Gulf Coast region.

“Basically, natural gas is more expensive everywhere else in the world, except for the Middle East,” he said.

Yergin said, for now, prices will likely remain under pressure. “Technology can really transform markets. The iPod transformed the music industry. Shale gas technology transformed the North American natural gas industry,” he said.